Land Reform in the Philippines

You’ve probably heard of President Rodrigo Duterte of the Philippines since his recent election in 2016. He’s most famous for calling for the extrajudicial killing of drug users. He has also instituted land reforms as part of his populist campaign. The article I’ll be discussing is about Duterte’s continued support for agricultural reforms in the Philippines including increasing government subsidies for fertilizer and training.

Since it was occupied by the Spanish and then the Americans and then briefly by the Japanese, the Philippines has had a small set of very wealthy landowners who control most of the land. When the Philippines gained independence in 1946, some modest land reforms began to be implemented. This meant regulating the types of contracts that could be enforced and encouraging 70-30 sharecropping contracts with tenants gaining the greater share of land production. Under a simple model of land agreements, regulating the type of contract to increase the share of the tenant worker would be an effective means of increasing the income of the tenant because land owners have an incentive to hire labor as long as hiring workers produces a larger profit than the alternative. The farms were much too large to be managed by the owners so the plantation owners had little alternative but to change the contract structure.

Later, in 1988 the Philippine government passed the Comprehensive Agrarian Reform Law (CARL). This law and its amendments still govern land reform in the Philippines today. Under the provision of CARL discussed in the article the Philippine government buys large tracts of land from private owners and divides and distributes the land to small farmers. The small farmers do pay a discounted price for the land in the form of a loan taken out from the Land Bank of the Philippines. The small farmers then receive the benefits of education, irrigation, crop insurance, and credit for inputs like fertilizer. This program should increase the efficiency of the agricultural labor market if it solves the principal-agent problem that is known as the Marshallian problem. This problem is characterized by a non-alignment of incentives between the land owner and the laborers hired by the landowners. A sharecropper not receiving the total benefit of her labor will not work to the efficient level of effort. See Figure 1 below. Catalyzing the permanent transfer of land from large to small landowners who supply labor for their own lands is functionally similar to forcing the landowners to establish fixed rent contracts with their laborers. In both cases the worker, now the small landholder, receives the total benefit of her labor and will thus exert the efficient level of effort.

Figure 1: Driver of Inefficiency in Sharecropping

We’ve already established in class that the most efficient contract under a variety of circumstances is the fixed rent contract. The different contract types and their benefits under different circumstances are shown in Figure 2. The definition of efficiency in this context is that resources are optimally allocated to make all parties as well off as possible. The fixed rent contract is maximally efficient because the most efficient allocation of resources is one in which the marginal cost and marginal benefit of labor are equal. When a worker is entitled to all of the output of their labor they will work up to that point.

No Risk

Risk

Effort Observable

Fixed rent – efficient

Wages – efficient

Sharecropping – efficient as long as effort is included in the contract

Fixed rent – efficient

Wages – efficient

Sharecropping – efficient as long as effort is included in the contract

Effort Unobservable

Fixed rent – efficient

Wages – efficient

Sharecropping – efficient as long as returns are included in the contract

Fixed rent – efficient

Sharecropping – less efficient

Wages – least efficient

Figure 2: Matrix of Contract Type Efficiencies.

The fixed rent contract does have drawbacks, particularly that the worker must deal with all of the risk involved in farming. The worker is likely more risk-averse than the landowner due to wealth differences so this absorption of risk by the worker can be non-optimal. The difficulty is that if the worker and landowner agree to a different contract type that shifts more risk to the landowner, such as a sharecropping contract, the incentive to exert effort is at least partially removed.

CARL attempts to mitigate the problem posed by risk aversion by providing crop insurance to the new small farmers. However, crop insurance can also reduce efficiency by causing moral hazard. In this context moral hazard means that the farmer will not exert effort up to the efficient level because she knows that if the crop fails she will still receive some portion of the crop from the insurance scheme. This is usually mitigated by designing the crop insurance such that the farmer receives only a portion of the planted crop.

Another feature of the program is the splitting of land into smaller segments. Up until now we have assumed constant returns to scale. However, there are economies of scale in farming that arise from farming knowledge, irrigation, tractors, transportation of goods and other fixed capital costs. Splitting the farms into smaller segments could destroy these economies of scale and make agriculture less efficient. Again, CARL anticipates and attempts to mitigate these problems by providing for collective irrigation programs and spreading institutional knowledge.

CARP decades-long attempt to reduce poverty and increase the agricultural productivity has been only mildly successful. The recipients of the program have a poverty rate which is reduced from 47.6 to 45.2 percent, a relatively tiny change (Guardian 2003). The disappointing results of this program are most likely a result of the destruction of the economies of scale associated with large scale agriculture. It seems that Duterte will continue the mistakes of his predecessors by continuing to push the same agenda of land reform. These reforms are popular for the public but fail to make the promised impact.

3 thoughts on “Land Reform in the Philippines”

Reading your take on the Phillipine land reform and the possibility of diseconomies of scale regarding the land parcel size both thorough and interesting. However, I wonder if the return on investment for most crops is unprofitable due to both current market price AND diseconomies of scale. The Phillipines Statistics Authority reports in 2016 reports that 81% of the crops planted we’re accounted for by either Palay, Corn, and Coconut(Phillipines Statistics Agency). However, Entrepreneur magazine’s PH office wrote an article titled “What are the Most Profitable Farm Products to Grow in the Philippines?”. In the article, they report that palay returns about 40.7%(14,651 PH) on investment per hectacre, corn return 39.1%(7,826 PH), and statistics on coconuts remained unavailable(Dy). As state above, these land “loans” generally amount 5 hectacres, which would put the majority of profit for popular crops between 39,130PH and 73,255PH for these farmers. For reference, the national poverty line in the Phillipines was set at 100,534PH. This, to me, seems to indicate that as you state – economies of scale play an important role regarding agriculture profit. This also indicates that crop choice probably has an effect on the poverty rate as well. I wonder if palay and corn are preferred because the seeds are more readily available or are cheaper to grow – though with lower yields – than alternatives. It may be that corn and palay are resilence crops and that’s why they are selected. Whatever the case is, I’d love to see a study eventually done regarding crop choices of these farmers – to confirm if they are indeed choosing this crops – and maybe get some intuition about why.

At the beginning of your post, you mention that the president is also planning to increase subsidies for fertilizer and training. I wonder how much of these programs can off-set the inefficiencies that brought up from the share-cropping contract? Such incentives promote increases in output which could make tenants put in the effort necessary to achieve the first-best outcome.

The decrease in poverty rates for those in the CARL program seems to me to be caused by several different factors including just the decrease from smaller farm sizes. The principal-agent problem does seem to be solved here, and the other problem mentioned in your blog is moral hazard, which would cause the tenant to shirk. However, if many of these individuals are already below the poverty line, they may have other incentives that drive them to work hard. Your analysis of the imperfect information problems seems sound, and so I can only conclude that the majority of the problem stems from how the government carries out the CARL objectives, and any corruption that may be involved in this as well.

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